Did 19th century companies ever offload divisions?

[Anstecker]

In modern business thinking, it's a standard idea that when a company division is underperforming or doesn't fit with your main business strengths you look at spinning it off or selling it to another company who might value it more, and get funding to develop core businesses where you have an operational advantage. Did 19th century railway companies ever do anything like that? Or was the mindset just grow-grow-grow to the moon, and sell up completely to a bigger company if that didn't work? And if not were there legal or parliamentary pressures that prevented sales that could create a regional monopoly?

For instance, in retrospect you wonder if the LSWR should have just given up on west of Plymouth and sold up to the GWR, they could have used the money to do more obvious money-spinners like housing development in Surrey. Or the Midland or LMS offloading their share of the M&GN. I suppose in an age of high economic growth it must have seemed like these schemes would always pay off eventually, given that both companies just kept doubling down on both those projects.

 

[Sir Felix Pole]

The railway companies were very territorial and determined to block competitors, but of course perfectly happy with their own expansion. Countless duplicate lines of frankly dubious worth were built, but there wasn't any serious attempt to dump underperforming assets until nationalisation - by which time it was far too late. Some less than successful ancillary enterprises such as shipping services or hotels were, however, disposed of from time to time.

The SER and LCDR did effectively merge in 1899 (although remaining legally separate) after years of ruinous competition, and some duplicate lines were promptly dumped such as the SER line to Chatham Central. The GWR and LSWR did come to an agreement in Devon and Cornwall after the ruinous competition on the ocean liner traffic from Plymouth. The GC, GNR and GER proposed merger of 1908 was blocked by Parliament.

 

[Magdalia]

In modern business thinking, it's a standard idea that when a company division is underperforming or doesn't fit with your main business strengths you look at spinning it off or selling it to another company who might value it more, and get funding to develop core businesses where you have an operational advantage. Did 19th century railway companies ever do anything like that?

Modern business thinking is driven by companies being mainly financed by debt. If a division isn't performing well enough to cover the interest payments on the debt, then something has to be done.

In the 19th century railway companies were financed by equity, the issuance of shares to investors. If the company made a profit then they paid a dividend to the shareholders, if they didn't, there would be no dividend. Furthermore, most of the shareholders would be local business people where their own business's profitability depended on the railway, so they gained from the railway indirectly.

The SER and LCDR did effectively merge in 1899 (although remaining legally separate) after years of ruinous competition, and some duplicate lines were promptly dumped such as the SER line to Chatham Central. The GWR and LSWR did come to an agreement in Devon and Cornwall after the ruinous competition on the ocean liner traffic from Plymouth. The GC, GNR and GER proposed merger of 1908 was blocked by Parliament.

When financing is equity not debt, companies are passed from one owner to another mainly through mergers and acquisitions. Here cash does not need to be involved. Company A can acquire company B by giving company B's shareholders new company A shares in exchange for their shares in company B. Railway history has many examples of consolidation through mergers and acquisitions.

This method of corporate reorganisation predominated in the UK up to financial deregulation in the 1980s. An interesting example from that era, with tenuous links to the railway, is Hanson Trust.

 

[Taunton]

Same thing done a different way. The most common was selling out to a larger railway, generally the one they connected with. The business asset value was conventionally measured by a multiple of their dividends, and a number of companies around had never paid one since they were built, so seemed to have a low value, maybe much less than the value of their physical assets if sold off.

The London Tilbury & Southend just about broke even on passengers, and increasingly ran the heavy freight from Tilbury Docks at a loss because, headed to Birmingham or Manchester, they got a very small share of the freight charge, divided by mileage. However it did have a value to the Midland who could take the complete revenue to these cities, and avoid it being interchanged with the LNWR, so selling out to the Midland was a good transaction. Sometimes questioned why they didn't sell out to the Great Eastern. That was because there was little freight headed to GER destinations.

The South Wales local lines were commonly financial basketcases in their own right, but had as principal shareholders the coal mines they served, who wanted the service to continue. Three of them were effectively offloaded by their owners to the GWR in 1910, well ahead of the Grouping, only continuing separately in name.

You could say that the 1923 Grouping was an offloading by the shareholders of many of the companies, which were financially finished. The GWR got stuck with a lot of Welsh companies, but at least sorted out the accounts with the coal mines, who had treated their local railway through shareholding as something of a free resource. There were substantial arguments about actual asset value. The Cambrian wanted to transfer the wrecks of the two Abermule head-on collision locos, which happened just months before the Grouping, at what value was in their accounting books. The GWR insisted they were scrap.

 

[Rescars]

In the 19th century the larger companies tended to control as much as possible in-house. Many built their own locomotives and rolling stock for example. It must have been difficult to determine if the engineering division was underperforming, though it was clearly acceptable to go to an external supplier if demand outstripping in-house capacity.

There may have been a different rationale for some peripheral activities. The purpose of the many of the railway hotels was to win over (mainly first class) passengers from competing companies' trains - so the marketing gain was more significant than pure profitability.

 

[The exile]

P
You could say that the 1923 Grouping was an offloading by the shareholders of many of the companies, which were financially finished. The GWR got stuck with a lot of Welsh companies, but at least sorted out the accounts with the coal mines, who had treated their local railway through shareholding as something of a free resource.

Had the First World War not intervened, there would almost certainly been some interesting mergers and takeovers in the late 1910s - quite possibly ending up looking very different from the Big Four we are used to.

 

[Cricketer8for9]

There was a big one anyway in 1922 (I think) - LNWR and L&Y.

 

[The exile]

There was a big one anyway in 1922 (I think) - LNWR and L&Y.

Yes - in many ways it was odd that that went ahead, considering grouping was just around the corner anyway.

 

[Snow1964]

Because they were funded by equity (shares) not by loans (as is common nowadays), weren't really interested in selling loss making parts.

Tended to look at it as maintaining market share (geographic, virtually a local monopoly) so didn't want others taking over and increasing competition.

In most cases loss making lines would be closed (not sold) and asset stripped, everything from track, signal frames, rolling stock, yard cranes, even metal bridge beams, and by time everything useful was taken, wasn't anything worthwhile to sell.

 

[John Webb]

There was a big one anyway in 1922 (I think) - LNWR and L&Y.

Yes - in many ways it was odd that that went ahead, considering grouping was just around the corner anyway.

I understand that the LNWR and the L&Y worked closely together for various practical reasons and decided to amalgamate prior to the 1923 - my sources don't explain this in detail.

 

[etr221]

Something to be remembered is that, pre-natioanalisation, railway companies were statutory companies, each incorporated under, and subject to, its own legislation (Act(s) of Parliament), which constrained what they could do, and not 'Companies Act' companies, formed and acting under the more liberal regime established by those acts.

 

[Rescars]

Had the First World War not intervened, there would almost certainly been some interesting mergers and takeovers in the late 1910s - quite possibly ending up looking very different from the Big Four we are used to.

IIRC the original proposal post WW1 was not for a Big Four, but a big five in England with separate arrangements for London, Scotland and Ireland.

 

[Taunton]

In the 19th century the larger companies tended to control as much as possible in-house. Many built their own locomotives and rolling stock for example. It must have been difficult to determine if the engineering division was underperforming, though it was clearly acceptable to go to an external supplier if demand outstripping in-house capacity.

This commonly came because every few years steam locomotives were substantially overhauled, essentially taking them apart, replacing anything unserviceable, and putting it all back together again, in the railway workshop. The workload in the erecting shop was thus principally existing stock, and building new locos, whose assembly was essentially the same process, was a minor part of the operation. After some years all that really remained of the original construction was the builders plate. Of pre-WW2 locos on heritage lines there's not a lot on them that was not made from raw steel in BR days.

Not all companies did things in house. Some went the opposite way and contracted everything out, mostly to an adjacent larger neighbour. The line from Didcot to Winchester, for example, which appeared a minor GWR cross country line, was actually the independent Didcot Newbury & Southampton Railway, without any of its own rolling stock. The many such companies were also swept up by the 1923 Grouping, although nothing one might really notice.

 

[Sir Felix Pole]

In the USA, in contrast, there was a lot of swapping of lines between railroads and the selling of under performing branch lines to local 'short lines'. It is still ongoing today.

 

[Rescars]

The Oxford Companion makes some interesting points about 19th century railway amalgamations, such as how some came about because two companies lines converged making a through route and others through the absorbtion of a smaller company by a larger one. To the Victorians big was not always beautiful and they tended to mistrust amalgamations which could lead to the creation of a monopolistic network, such as that which created the GER. Accordingly, parliament refused to permit the proposed amalgamation of the SER and LBSC in 1868 and the merger between the LNWR and the L&Y in 1872-3.

 

[Merle Haggard]

Same thing done a different way. The most common was selling out to a larger railway, generally the one they connected with. The business asset value was conventionally measured by a multiple of their dividends, and a number of companies around had never paid one since they were built, so seemed to have a low value, maybe much less than the value of their physical assets if sold off.

The London Tilbury & Southend just about broke even on passengers, and increasingly ran the heavy freight from Tilbury Docks at a loss because, headed to Birmingham or Manchester, they got a very small share of the freight charge, divided by mileage. However it did have a value to the Midland who could take the complete revenue to these cities, and avoid it being interchanged with the LNWR, so selling out to the Midland was a good transaction. Sometimes questioned why they didn't sell out to the Great Eastern. That was because there was little freight headed to GER destinations.

The South Wales local lines were commonly financial basketcases in their own right, but had as principal shareholders the coal mines they served, who wanted the service to continue. Three of them were effectively offloaded by their owners to the GWR in 1910, well ahead of the Grouping, only continuing separately in name.

You could say that the 1923 Grouping was an offloading by the shareholders of many of the companies, which were financially finished. The GWR got stuck with a lot of Welsh companies, but at least sorted out the accounts with the coal mines, who had treated their local railway through shareholding as something of a free resource. There were substantial arguments about actual asset value. The Cambrian wanted to transfer the wrecks of the two Abermule head-on collision locos, which happened just months before the Grouping, at what value was in their accounting books. The GWR insisted they were scrap.

I'm not sure that the South Wales companies were basket cases in their day. The DSM Barrie history of the Barry Railway (built to avoid the stranglehold of the Cardiff docks and railways on coal exports) shows that they paid 9 1/2 % or 10% dividend to ordinary shareholders in their c20 days. I don't think this was unusual for the coal carriers. It was just unfortunate timing that a number of factors reduced the demand for export coal soon after the GWR took them over. The locos of some of S. Wales companies were in a very run-down state after the War, and unfortunately the GWR put considerable effort into re-buyilding many in the short period after take-over and before coal traffic levels 'fell off a cliff' and many became surplus anyway.

There were some real entrepreneurs in South Wales railway history; perhaps the most interesting being ?Thomas? Savin, who was the contractor to build lines for both the Cambrian and the Brecon & Merthyr and then operate them both. He also accepted payment for construction by shares in the companies involved which turned out to be not a wise choice. In the resulting bankruptcy it emerged that some locos were being hired to both companies simultaneously and others were 'lost' - possibly a euphemism for 'never existed in the first place'.

As far as the Cambrian Abermule accident victims went it was curious that the Cambrian bought two replacement locos. from the GWR in August 1921 and these received nominal (i.e. not carried) Cambrian numbers.

 

[Taunton]

I believe the two GWR replacement locos were loaned to the Cambrian rather than sold. All knew the Grouping was coming and the Cambrian had no spare cash. While the value of the Abermule wrecks, which were dumped behind Oswestry Works, was being argued over the GWR, as new owners, told their staff involved in the transition not to touch them. The main benefit of excessive valuation would have been to the directors and shareholders, a principal one, Lord Vane-Tempest, having had the misfortune to have been in the first class coach at the front of the eastbound Abermule train and was killed.

Three of the South Wales companies were "sold" to the GWR in 1910, sold in quotes because it was something like the GWR paid £1 for them, but assumed all the debts. They were the Port Talbot, the Rhondda & Swansea Bay, and the South Wales Mineral. The sale appears engineered by the government from behind the scenes.